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What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Canadian Utilities (TSE:CU), so let's see why.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Canadian Utilities, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = CA$890m ÷ (CA$23b - CA$691m) (Based on the trailing twelve months to September 2024).
Thus, Canadian Utilities has an ROCE of 3.9%. In absolute terms, that's a low return but it's around the Integrated Utilities industry average of 4.8%.
View our latest analysis for Canadian Utilities
In the above chart we have measured Canadian Utilities' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Canadian Utilities .
So How Is Canadian Utilities' ROCE Trending?
In terms of Canadian Utilities' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.7%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Canadian Utilities to turn into a multi-bagger.
Our Take On Canadian Utilities' ROCE
In summary, it's unfortunate that Canadian Utilities is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 11% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing to note, we've identified 3 warning signs with Canadian Utilities and understanding these should be part of your investment process.